Executive Trading: Why Unfair Moves May Be Legal

By Sam Mamudi

Insider trading can help outside investors as a signal in one direction or another — there’s a reason why we at Barron’s have a dedicated section. But the risk is that the trades unfairly advantage executives at the expense of everyone else.

Pulliam and Barry take a hard look at trades at several companies, including Big Lots Inc. (BIG), VeriFone Systems Inc. (PAY), Body Central Corp. (BODY) and Micrel Inc. (MCRL), none of which look good to an outsider, though in each case the companies deny (or don’t comment on) any suspicions.

The crux, though, is that while the moves may look fishy they’re perfectly legal, thanks to what the story suggests is flawed regulation:

A Securities and Exchange Commission rule requires executives to report trades in their own company’s stock within 48 hours. But getting a bead on trading by corporate executives has become more complicated, not less, in recent years, thanks to a proliferation of trading plans that provide for periodic buying or selling.

[...]the system has numerous shortcomings. Companies and executives don’t have to file these trading plans with any federal agency. That means the plans aren’t readily available for regulators, investors or anyone else to examine.

Moreover, once executives file such trading plans, they remain free to cancel or change them—and don’t have to disclose that they have done so.

Finally, even when executives have such a preset plan, they are free to trade their companies’ stock at other times, outside of it.

In other words, the rules seem designed to make it hard to figure out if an executive gained from insider knowledge. I know the new SEC chair will have a lot on their plate on replacing Mary Schapiro, but for the sake of the markets this seems like an issue worth revisiting.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.